U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended September 30, 2008
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition Period From  to .
 Commission file number 000-25727
 IKONICS CORPORATION
 
  Minnesota
    
    41-0730027(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)4832 Grand AvenueDuluth, Minnesota
    
    55807(Address of principal executive offices)
    
    (Zip code)
 Issuers telephone number
  
  þ o
 o þ
   Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ




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IKONICS Corporation
  PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Balance Sheets as of September 30, 2008 (unaudited)
and December 31, 2007
    
    
    3Condensed Statements of Operations for the Three Months and
Nine Months Ended September 30, 2008 and 2007 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and 2007 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II.
    
    OTHER INFORMATION
    
    
    21SIGNATURES
    
    
    22
  2




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##### 



FINANCIAL INFORMATION
 
 ITEM 1. Condensed Financial Statements
 IKONICS CORPORATION
 
 CONDENSED BALANCE SHEETS
 September 30
    
    
    December 312008
    
    
    2007(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,481,128
    
    
    $
    1,230,020Short-term investments
    
    
    
    
    
    
    3,550,000Trade receivables, less allowance of $45,000
    
    
    2,064,360
    
    
    
    2,025,257Inventories
    
    
    2,104,190
    
    
    
    2,355,864Deposits, prepaid expenses and other assets
    
    
    236,745
    
    
    
    130,596Income tax refund receivable
    
    
    37,756
    
    
    
    Deferred income taxes
    
    
    24,000
    
    
    
    24,000Total current assets
    
    
    6,948,179
    
    
    
    9,315,737PROPERTY, PLANT, AND EQUIPMENT, at cost:Land and building
    
    
    1,952,646
    
    
    
    1,631,142Machinery and equipment
    
    
    2,877,682
    
    
    
    2,700,816Office equipment
    
    
    832,886
    
    
    
    812,120Vehicles
    
    
    241,905
    
    
    
    219,964Construction in progress
    
    
    3,074,973
    
    
    
    8,980,092
    
    
    
    5,364,042Less accumulated depreciation
    
    
    4,247,325
    
    
    
    4,043,4514,732,767
    
    
    
    1,320,591INTANGIBLE ASSETS, less accumulated amortization of $256,512 in
2008 and $213,061 in 2007
    
    
    404,420
    
    
    
    479,888DEFERRED INCOME TAXES
    
    
    11,000
    
    
    
    11,000INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
    
    
    855,201
    
    
    
    855,201$
    12,951,567
    
    
    $
    11,982,417LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payableTrade
    
    $
    481,411
    
    
    $
    435,572Construction
    
    
    711,827
    
    
    
    Accrued compensation
    
    
    238,934
    
    
    
    347,691Other accrued expenses
    
    
    133,626
    
    
    
    148,149Income taxes payable
    
    
    
    
    
    
    5,291Total current liabilities
    
    
    1,565,798
    
    
    
    936,703STOCKHOLDERS EQUITY:Preferred stock, par value $.10 per share; authorized 250,000
shares; issued noneCommon stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 2,007,367 shares in 2008 and 2,045,961 in 2007
    
    
    200,737
    
    
    
    204,596Additional paid-in capital
    
    
    2,210,404
    
    
    
    2,124,342Retained earnings
    
    
    8,974,628
    
    
    
    8,716,776Total stockholders equity
    
    
    11,385,769
    
    
    
    11,045,714$
    12,951,567
    
    
    $
    11,982,417
  3




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##### 



IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007NET SALES
    
    $
    3,832,783
    
    
    $
    4,016,923
    
    
    $
    11,943,690
    
    
    $
    11,899,367COSTS AND EXPENSES:Cost of goods sold
    
    
    2,178,597
    
    
    
    2,186,892
    
    
    
    6,798,858
    
    
    
    6,794,437Selling, general, and administrative
    
    
    1,187,912
    
    
    
    1,158,735
    
    
    
    3,709,842
    
    
    
    3,601,132Research and development
    
    
    219,071
    
    
    
    186,295
    
    
    
    601,781
    
    
    
    582,5033,585,580
    
    
    
    3,531,922
    
    
    
    11,110,481
    
    
    
    10,978,072INCOME FROM OPERATIONS
    
    
    247,203
    
    
    
    485,001
    
    
    
    833,209
    
    
    
    921,295GAIN ON SALE OF NON-MARKETABLE
EQUITY SECURITIES
    
    
    24,550
    
    
    
    
    
    
    
    24,550
    
    
    
    55,159INTEREST INCOME
    
    
    19,890
    
    
    
    40,616
    
    
    
    87,262
    
    
    
    110,247INCOME BEFORE INCOME TAXES
    
    
    291,643
    
    
    
    525,617
    
    
    
    945,021
    
    
    
    1,086,701INCOME TAX EXPENSE
    
    
    53,810
    
    
    
    171,692
    
    
    
    243,113
    
    
    
    262,277NET INCOME
    
    $
    237,833
    
    
    $
    353,925
    
    
    $
    701,908
    
    
    $
    824,424EARNINGS PER COMMON SHARE:Basic
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.34
    
    
    $
    0.41Diluted
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.34
    
    
    $
    0.40WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING :Basic
    
    
    2,070,705
    
    
    
    2,042,113
    
    
    
    2,066,395
    
    
    
    2,029,110Diluted
    
    
    2,073,925
    
    
    
    2,074,569
    
    
    
    2,070,134
    
    
    
    2,061,400
  4




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##### 



IKONICS CORPORATION
 
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine MonthsEnded September 302008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    701,908
    
    
    $
    824,424Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    219,271
    
    
    
    203,981Amortization
    
    
    43,451
    
    
    
    40,282Excess tax benefit from share-based payment arrangement
    
    
    (39,319
    )
    
    
    (31,997
    )Stock based compensation
    
    
    13,939
    
    
    
    14,185Gain on sale of vehicles
    
    
    (1,725
    )
    
    
    (7,341
    )Loss on intangible asset abandonment
    
    
    66,746
    
    
    
    Gain on sale of non-marketable equity securities
    
    
    (24,550
    )
    
    
    (55,159
    )Deferred income taxes
    
    
    
    
    
    
    9,000Changes in working capital components:Trade receivables
    
    
    (39,103
    )
    
    
    (120,974
    )Inventories
    
    
    251,674
    
    
    
    488,268Prepaid expenses and other assets
    
    
    (106,149
    )
    
    
    45,553Income taxes receivable
    
    
    (37,756
    )
    
    
    Accounts payable
    
    
    45,839
    
    
    
    164,506Accrued liabilities
    
    
    (123,280
    )
    
    
    (142,089
    )Income taxes payable
    
    
    38,417
    
    
    
    (48,377
    )Net cash provided by operating activities
    
    
    1,009,363
    
    
    
    1,384,262CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, equipment and construction in progress
    
    
    (2,926,395
    )
    
    
    (545,500
    )Proceeds from sale of vehicles
    
    
    8,500
    
    
    
    11,500Purchase of intangibles
    
    
    (34,729
    )
    
    
    (39,935
    )Purchase of short-term investments
    
    
    
    
    
    
    (375,000
    )Proceeds from sale of short-term investments
    
    
    3,550,000
    
    
    
    Purchase of non-marketable equity securities
    
    
    
    
    
    
    (63,750
    )Proceeds from sale of non-marketable equity securities
    
    
    24,550
    
    
    
    252,618Net cash provided (used in) investing activities
    
    
    621,926
    
    
    
    (760,067
    )CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefit from share-based payment arrangement
    
    
    39,319
    
    
    
    31,997Repurchase of common stock
    
    
    (526,212
    )
    
    
    Proceeds from exercise of stock options
    
    
    106,712
    
    
    
    71,722Net cash provided by (used in) financing activities
    
    
    (380,181
    )
    
    
    103,719NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    1,251,108
    
    
    
    727,914CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    1,230,020
    
    
    
    253,186CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,481,128
    
    
    $
    981,100SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid for income taxes
    
    $
    284,348
    
    
    $
    342,653SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIESConstruction payables incurred for building expansion
    
    $
    711,827
    
    
    $
    
  5




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##### 



IKONICS CORPORATION
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  1.
    
    Basis of PresentationThe balance sheet of IKONICS Corporation (the Company) as of September 30, 2008, and the
related statements of operations for the three and nine months ended September 30, 2008 and
2007, and cash flows for the nine months ended September 30, 2008 and 2007, have been
prepared without being audited.In the opinion of management, these statements reflect all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position of IKONICS
Corporation as of September 30, 2008, and the results of operations and cash flows for all
periods presented.Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted. Therefore, these statements should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual
Report on Form 10-KSB for the year ended December 31, 2007.The results of operations for interim periods are not necessarily indicative of results that
will be realized for the full fiscal year.2.
    
    InventoryThe major components of inventory are as follows:
 Sep 30, 2008
    
    
    Dec 31, 2007Raw materials
    
    $
    1,334,984
    
    
    $
    1,373,835Work-in-progress
    
    
    322,261
    
    
    
    296,998Finished goods
    
    
    1,177,419
    
    
    
    1,308,917Reduction to LIFO cost
    
    
    (730,474
    )
    
    
    (623,886
    )Total Inventory
    
    $
    2,104,190
    
    
    $
    2,355,864
 6




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##### 



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  3.
    
    Earnings Per Common Share (EPS)Basic EPS is calculated using net income divided by the weighted average of common shares
outstanding. Diluted EPS is similar to Basic EPS except that the weighted average number of
common shares outstanding is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares, such as those
shares subject to options, had been issued.Shares used in the calculation of diluted EPS are summarized below:
 Three Months EndedSep 30, 2008
    
    
    Sep 30, 2007Weighted average common shares outstanding
    
    
    2,070,705
    
    
    
    2,042,113Dilutive effect of stock options
    
    
    3,220
    
    
    
    32,456Weighted average common and common equivalent shares outstanding
    
    
    2,073,925
    
    
    
    2,074,569
 Nine Months EndedSep 30, 2008
    
    
    Sep 30, 2007Weighted average common shares outstanding
    
    
    2,066,395
    
    
    
    2,029,110Dilutive effect of stock options
    
    
    3,739
    
    
    
    32,290Weighted average common and common equivalent shares outstanding
    
    
    2,070,134
    
    
    
    2,061,400
 4.
    
    Stock-based CompensationThe Company has a stock incentive plan for the issuance of up to 342,750 shares of common
stock. The plan provides for granting eligible participants stock options or other stock
awards, as described by the plan, at option prices ranging from 85% to 110% of fair market
value at date of grant. Options granted expire up to seven years after the date of grant.
Such options generally become exercisable over a one to three year period. A total of
46,673 shares of common stock are reserved for additional grants of options under the plan
at September 30, 2008.The Company charged compensation cost of $5,900 against income for the three months ended
September 30, 2008 and $4,700 against income for the three months ended September 30, 2007.
For the first nine months of 2008 and 2007, the Company charged compensation cost of
approximately $14,000 against income. As of September 30, 2008 there was approximately
$39,000 of unrecognized compensation cost related to unvested share-based compensation
awards granted. That cost is expected to be recognized over the next three years.The Company receives a tax deduction for certain stock option exercises during the period in
which the options are exercised, generally for the excess of the market price at the time
the stock options are exercised over the exercise price of the options, which increased the
APIC pool, which is the amount that represents the pool of excess tax benefits available to
absorb tax shortages. For the nine months ended September 30, 2008, $39,319 of excess tax
benefits were reported as operating and financing cash flows compared to $31,997 for the
nine months ended September 30, 2007. The Companys APIC pool totaled $111,029 and $71,709
at September 30, 2008 and December 31, 2007, respectively.Proceeds from the exercise of stock options were $106,712 and $71,722 for the nine months
ended September 30, 2008 and 2007, respectively.
 7




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##### 



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  The fair value of options granted during the nine months ended September 30, 2008 was
estimated using the Black-Scholes option pricing model with the following assumptions:
 Dividend yield
    
    0%Expected volatility
    
    55.0%-56.3%Expected life of option
    
    Five YearsRisk-free interest rate
    
    3.00%-3.25%Fair value of each option on grant date
    
    $3.44 - $4.05
 There were no options granted during the nine months ended September 30, 2007.Stock option activity during the nine months ended September 30, 2008 was as follows:
 WeightedAverageExerciseShares
    
    PriceOutstanding at beginning of period
    
    
    52,622
    
    
    $
    4.03Granted
    
    
    10,250
    
    
    
    7.38Exercised
    
    
    (35,872
    )
    
    
    2.97Expired and forfeited
    
    
    (750
    )
    
    
    7.01Outstanding at 9/30/08
    
    
    26,250
    
    
    
    6.69
 The aggregate intrinsic value of all options outstanding and for those exercisable at
September 30, 2008 was $45,490 and $33,969, respectively. The total intrinsic value of
options exercised was $211,363 and $218,976 for the nine month period ended September 30,
2008 and 2007, respectively.5.
    
    Building Expansion ProjectIn April 2008, the Company acquired an 11 acre property for $366,000 and began construction
on a new 35,000 square foot manufacturing and warehouse facility. The new facility is
necessary to accommodate the Companys new business initiatives and growth plans and is
expected to be completed by the end of 2008. The entire project, including the purchase of
the land, is expected to cost $4,500,000. Through September 30, 2008 the Company had
incurred costs of $3,441,000 of which $711,827 was included in construction accounts
payable.
 8




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##### 



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  6.
    
    Segment InformationThe Companys reportable segments are strategic business units that offer different products
and have varied customer bases. There are three reportable segments: Domestic, Export,
and IKONICS Imaging.
Domestic sells screen printing film, emulsions, and inkjet receptive film to distributors
located in the United States and Canada. IKONICS Imaging sells photo resistant film, art
supplies, glass, metal medium and related abrasive etching equipment to end user customers
located in the United States and Canada. It is also entering the market for etched
ceramics, glass and silicon wafers; and is developing and selling proprietary inkjet
technology. Export sells primarily the same products as Domestic and IKONICS Imaging to
foreign customers. The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting policies included in
the Companys Annual Report on Form 10-KSB for the year ended December 31, 2007.Management evaluates the performance of each segment based on the components of divisional
income, and with the exception of accounts receivable, does not allocate assets and
liabilities to segments. Financial information with respect to the reportable segments
follows:For the three months ended September 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,770,792
    
    
    $
    1,070,894
    
    
    $
    991,097
    
    
    $
    
    
    
    $
    3,832,783Cost of goods sold
    
    
    907,877
    
    
    
    749,647
    
    
    
    521,073
    
    
    
    
    
    
    
    2,178,597Selling, general and
administrative*
    
    
    316,160
    
    
    
    116,687
    
    
    
    297,583
    
    
    
    457,482
    
    
    
    1,187,912Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,071
    
    
    
    219,0711,224,037
    
    
    
    866,334
    
    
    
    818,656
    
    
    
    676,553
    
    
    
    3,585,580Income (loss) from
operations
    
    $
    546,755
    
    
    $
    204,560
    
    
    $
    172,441
    
    
    $
    (676,553
    )
    
    $
    247,203
 For the three months ended September 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    1,741,960
    
    
    $
    1,267,710
    
    
    $
    1,007,253
    
    
    $
    
    
    
    $
    4,016,923Cost of goods sold
    
    
    946,154
    
    
    
    777,616
    
    
    
    463,122
    
    
    
    
    
    
    
    2,186,892Selling, general and
administrative*
    
    
    288,455
    
    
    
    93,382
    
    
    
    348,110
    
    
    
    428,788
    
    
    
    1,158,735Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186,295
    
    
    
    186,2951,234,609
    
    
    
    870,998
    
    
    
    811,232
    
    
    
    615,083
    
    
    
    3,531,922Income (loss) from
operations
    
    $
    507,351
    
    
    $
    396,712
    
    
    $
    196,021
    
    
    $
    (615,083
    )
    
    $
    485,001
 9




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##### 



IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  For the nine months ended September 30, 2008:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    4,962,181
    
    
    $
    3,650,622
    
    
    $
    3,330,887
    
    
    $
    
    
    
    $
    11,943,690Cost of goods sold
    
    
    2,655,735
    
    
    
    2,464,993
    
    
    
    1,678,130
    
    
    
    
    
    
    
    6,798,858Selling, general and
administrative*
    
    
    902,912
    
    
    
    318,190
    
    
    
    973,622
    
    
    
    1,515,118
    
    
    
    3,709,842Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    601,781
    
    
    
    601,7813,558,647
    
    
    
    2,783,183
    
    
    
    2,651,752
    
    
    
    2,116,899
    
    
    
    11,110,481Income (loss) from
operations
    
    $
    1,403,534
    
    
    $
    867,439
    
    
    $
    679,135
    
    
    $
    (2,116,899
    )
    
    $
    833,209
 For the nine months ended September 30, 2007:
 IKONICSDomestic
    
    
    Export
    
    
    Imaging
    
    
    Other
    
    
    TotalNet Sales
    
    $
    4,933,275
    
    
    $
    3,637,174
    
    
    $
    3,328,918
    
    
    $
    
    
    
    $
    11,899,367Cost of goods sold
    
    
    2,764,261
    
    
    
    2,465,928
    
    
    
    1,564,248
    
    
    
    
    
    
    
    6,794,437Selling, general and
administrative*
    
    
    850,825
    
    
    
    334,182
    
    
    
    1,081,295
    
    
    
    1,334,830
    
    
    
    3,601,132Research and
development*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582,503
    
    
    
    582,5033,615,086
    
    
    
    2,800,110
    
    
    
    2,645,543
    
    
    
    1,917,333
    
    
    
    10,978,072Income (loss) from
operations
    
    $
    1,318,189
    
    
    $
    837,064
    
    
    $
    683,375
    
    
    $
    (1,917,333
    )
    
    $
    921,295
 Accounts receivable by segment as of September 30, 2008 and December 31, 2007 were as follows:
 Sep 30, 2008
    
    
    Dec 31, 2007Domestic
    
    $
    1,105,555
    
    
    $
    980,906Export
    
    
    651,763
    
    
    
    712,936IKONICS Imaging
    
    
    307,665
    
    
    
    356,272Other
    
    
    (623
    )
    
    
    (24,857
    )Total
    
    $
    2,064,360
    
    
    $
    2,025,257
 
 *
    
    The Company does not allocate all general and administrative expenses or any research and
development
expenses to its operating segments for internal reporting. 7.
    
    Income TaxesOn January 1, 2007, the Company adopted the provisions of Financial Standards Accounting
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). As a
result of the
 10




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IKONICS CORPORATION
 NOTES TO CONDENSED FINANCIAL STATEMENTS
  implementation of FIN 48, the Company recorded a liability for unrecognized
tax benefits of $137,000, which was accounted for as a reduction in retained earnings as of
January 1, 2007 for the cumulative effect of a change in accounting principle as provided
for by FIN 48. The balance of the unrecognized tax benefits at adoption, exclusive of
interest, was $122,000. During the first quarter of 2007 and 2008, the statute of
limitations for the relevant taxing authority to examine and challenge the tax position for
an open
year expired, resulting in decreases in income tax expense of $45,000 for the first nine
months of 2007 and $44,000 for the nine months of 2008. As of September 30, 2008, the
liability for unrecognized tax benefits totaled $54,000 compared to a liability of $96,000
as of September 30, 2007. The liability for unrecognized tax benefits is included in other
accrued expenses.The Company is subject to taxation in the United States and various states. The material
jurisdictions that are subject to examination by tax authorities primarily include Minnesota
and the United States, for tax years 2005, 2006, and 2007.It has been the Companys policy since 2007 to recognize interest and penalties related to
uncertain tax positions in income tax expense. The Company also accrued potential interest
of $3,000 related to these unrecognized tax benefits during the first nine months of 2008
bringing the total accrued interest to $8,500 as of September 30, 2008. The unrecognized
tax benefits at September 30, 2008 relate to taxation of foreign export sales.A reconciliation of the beginning and ending amounts of unrecognized tax benefit for the
first nine months of 2008 is as follows:
 Balance at December 31, 2008
    
    $
    98,000Expiration of the statute of limitations for the
assessment of taxes
    
    
    (44,000
    )Balance at September 30, 2008
    
    $
    54,000
 The balance of unrecognized tax benefits totaling $54,000 at September 30, 2008, if
reversed, would decrease the provision for income taxes and increase net income by the same
amount and reduce the Companys effective tax rate.
 11




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The information presented below in Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the meaning of the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are
subject to risks and uncertainties, including those discussed under Factors that May Affect Future
Results below, that could cause actual results to differ materially from those projected. Because
actual results may differ, readers are cautioned not to place undue reliance on these
forward-looking statements. Certain forward-looking statements are indicated by italics.
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Factors that May Affect Future Results
 
    
    The Companys belief that additional proceeds will be received from the sale of
Apprise common and preferred stock that occurred in 2007Actual additional proceeds
received may be impacted by unanticipated expenses related to indemnification clauses
as part of the agreement between Apprise and its purchaser.
    
    The Companys expectation that its effective tax rate will return to 30% to 31% of
pretax income for the last quarter of 2008 compared to the tax rate of 25.7% recorded
in the first nine month of 2008The effective tax rate for the fourth quarter of 2008
may be affected by changes in federal and state tax law, unanticipated changes in the
Companys financial position or the Companys actions could increase or decrease its
effective tax rate.
    
    The Companys belief that the quality of its receivables is high and that strong
internal controls are in place to maintain proper collectionsThis belief may be
impacted by domestic economic conditions, by economic, political, regulatory or social
conditions in foreign markets, or by the failure of the Company to properly implement
or maintain internal controls.
    
    The Companys belief that the total cost of its new facility construction project
will be $4.5 million and depreciation expense will increase by $130,000 annually upon
occupancy of the new facilityActual construction costs and future depreciation expense
may increase or decrease due to changes in construction costs, changes to the building
design, regulatory changes and changes in accounting rules.
    
    The belief that the Companys current financial resources, cash generated from
operations and the Companys capacity for debt and/or equity financing will be
sufficient to fund current and anticipated business operations and capital
expenditures. The belief that the Companys low debt levels and available line of
credit make it unlikely that a decrease in product demand would impair the Companys
ability to fund operationsChanges in anticipated operating results, credit
availability, equity market conditions or the Companys debt levels may further enhance
or inhibit the Companys ability to maintain or raise appropriate levels of cash.
    
    The Companys expectations as to the level and use of planned capital expenditures
and that capital expenditures will be funded with cash on hand and cash generated from
operating activitiesThis
 12




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expectation may be affected by changes in the Companys
anticipated capital expenditure requirements resulting from unforeseen required
maintenance, repairs, capital asset additions or increases in construction costs. The
funding of planned or unforeseen expenditures may also be affected by changes in
anticipated operating results resulting from decreased sales, lack of acceptance of new
products or increased operating expenses or by other unexpected events affecting the
Companys financial position.
    
    The Companys belief that its vulnerability to foreign currency fluctuations and
general economic conditions in foreign countries is not significantThis belief may be
impacted by economic, political and social conditions in foreign markets, changes in
regulatory and competitive conditions, a change in the amount or geographic focus of
the Companys international sales, or changes in purchase or sales terms.
    
    The Companys plans to continue to invest in research and development efforts,
expedite internal product development and invest in technological alliances, as well as
the expected focus and results of such investmentsThese plans and expectations may be
impacted by general market conditions, unanticipated changes in expenses or sales,
delays in the development of new products, technological advances, the ability to find
suitable and willing technology partners or other changes in competitive or market
conditions.
    
    The Companys efforts to grow its international businessThese efforts may be
impacted by economic, political and social conditions in current and anticipated
foreign markets, regulatory conditions in such markets, unanticipated changes in
expenses or sales, changes in competitive conditions or other barriers to entry or
expansion.
    
    The Companys belief as to future activities that may be undertaken to expand the
Companys businessActual activities undertaken may be impacted by general market
conditions, competitive conditions in the Companys industry, unanticipated changes in
the Companys financial position, lack of acceptance of new products or the inability
to identify attractive acquisition targets or other business opportunities.
 Critical Accounting Policies
  Accounts Receivable.
 Inventories.
 Income Taxes.
 13




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##### 



Investments in Non-Marketable Equity Securities
 Revenue Recognition.
 Results of Operations
 Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007
 Sales.
 Cost of Goods Sold
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 14




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##### 



Interest Income.
 Income Taxes.
 Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
 Sales.
 Cost of Goods Sold .
 Selling, General and Administrative Expenses
 Research and Development Expenses
 Gain on Sale of Non-Marketable Equity Securities.
 15




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##### 



Interest Income.
 Income Taxes
 Liquidity and Capital Resources
     16




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##### 



17




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##### 



Capital Expenditures
   International Activity
   Future Outlook
    Recent Accounting Pronouncements
  18




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##### 



Off Balance Sheet Arrangements
  19




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##### 



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
   20




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##### 



OTHER INFORMATION
 ITEM 1. Legal Proceedings
  ITEM 1A. Risk Factors
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities (1)
 (c) Total Number ofShares Purchased as
    
    (d) Maximum Number of(a) Total Number
    
    
    
    
    
    Part of Publicly
    
    Shares that Mayof
    
    (b) Average Price
    
    Announced Plans
    
    Yet Be Purchased UnderShares Purchased
    
    Paid per Share
    
    or Programs
    
    The Plans or ProgramsJuly 1, 2008 through July 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    August 1, 2008 through August 31, 2008
    
    
    3,335
    
    
    $
    8.06
    
    
    
    3,335
    
    
    
    146,672September 1, 2008 through September
30, 2008
    
    
    71,131
    
    
    $
    7.02
    
    
    
    71,131
    
    
    
    75,54174,466
    
    
    $
    7.07
    
    
    
    74,466
 
 (1)
    
    In prior years, the Companys board of directors had authorized the repurchase of up to
150,000 shares of common stock. In August 2008, the Companys Board of Directors approved
the repurchase of up to an additional 100,000 shares of common stock bringing the total
shares eligible for repurchase to 250,000. A total of 174,459 shares have been repurchased
under this program, including 74,466 shares repurchased during the third quarter of 2008.
The plan allows for an additional 75,541 shares to be repurchased. The program does not
have an expiration date. ITEM 3. Defaults upon Senior Securities
  ITEM 4. Submission of Matters to a Vote of Security Holders
  ITEM 5. Other Information
  ITEM 6. Exhibits
  Exhibit
    
    Description3.1
    
    Restated Articles of Incorporation of Company, as amended.13.2
    
    By-Laws of the Company, as amended.131.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO32
    
    Section 1350 Certifications
  
 1
    
    Incorporated by reference to the like numbered Exhibit
to the Companys Registration Statement on Form 10-SB (File No. 000-25727). 21




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##### 



SIGNATURES
  IKONICS CORPORATIONDATE: November 13, 2008
    By:
    /s/ Jon GerlachJon Gerlach,Chief Financial Officer, and
Vice President of 
     Finance 22




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##### 



INDEX TO EXHIBITS
 Exhibit
    
    Description
    
    Page3.1
    
    Restated Articles of Incorporation of Company, as amended
    
    Incorporated by reference3.2
    
    By-Laws of the Company, as amended.
    
    Incorporated by reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of CEO.
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of CFO.
    
    Filed Electronically32
    
    Section 1350 Certifications.
    
    Filed Electronically